Whether you’re a venture capital, private equity, or a hedge fund, there’ll come a time when the partners and fund managers need to raise capital. Below are 3 tools fund managers currently use to raise capital from investors, ranging from traditional to the newer methods.
Broker Dealers/Placement Agents/Investment Banks:
These entities provide intermediary services, connecting fund managers with prospective investors. Broker-dealers for example can consist of a single individual or a large firm specializing in the business of buying and selling securities on behalf of clients. These firms provide product distribution services through investor networks. Since these agents are registered to act on a client’s behalf to sell securities, they have a fiduciary duty to ensure the particular investment meets a certain investment standard. This requires the performance of due diligence on the opportunity to be able to sell it to clients and be confident in the quality of the offering.
Pros: These firms will actively shop securities, which is not allowed to a non-registered entity. Quality control is an ultimate pro if the agent has a good reputation for providing good issuances. Distribution to investors and built-in compliance are important. Additionally, they will help with the creation of professional investment presentation materials which will help attract more investors. Tapping into institutional capital can be very difficult and time-consuming. Many of these firms have deep connections to institutional capital and specialize in strategies to present the company or fund in the best light to these investors. Investors are increasingly demanding detailed due diligence and professionally curated investment materials. These firms specialize in this aspect of the capital raising process, so that the fund manager or company can focus more on their underlying business.
Cons: These firms charge a percentage on the capital placement which could end up being very costly. These intermediaries can be valuable for an issuer without an extensive network or experience raising capital, but can be burdensome in terms of compliance and cost. As with any agent relationship, there are potential conflicts of interest that arise. For example, within the New York City pension system, some placement agents were providing kickbacks to pension officials in exchange for investment commitments. This resulted in the eventual ban on placement agents connected to the pension fund.
These events are offered by large brokerage firms and third party event organizers to link potential investors with private placement opportunities. Large brokerage houses like Morgan Stanley provide cap intro services to hedge funds that use them for their prime brokerage services such as clearing, custody, and asset servicing. Event producers organize events around connecting investors and issuers as well.
Pros: In the high touch business of alternative investing, face to face connections are typically the best way to form an effective working relationship. Particularly with exempt securities, many times forming personal connections are the only way to garner investment interest. Cap intro events are a good way to network, although there are obviously no guarantees any investor will commit to your offering.
Cons: These events are typically very expensive for the issuer depending on how attractive the investor base is at the event. For example, many of these events could cost over $10K a person. Additionally, there’s no guarantee of successfully circling up any investments. An issuer could go to ten of these and still leave with zero commitments.
Raising Capital Online:
With the increasing implementation of technology, private funds can now raise capital online through digital platforms. There are various models within this ecosystem. Some online platforms are merely online broker-dealers, while others such as DarcMatter, lean closer to being an open marketplace for investment opportunities and investors. The idea is that through a platform, issuers and qualified investors can now connect and diligence opportunities in a compliant and seamless way. This serves to lessen much of the traditionally opaque and fragmented nature of the industry, bringing further transparency to the entire capital raising and investing process. Combined with the growing adaptation of using the Internet when it comes to raising capital, this will result in the disintermediation and democratization between investors and fund managers.
Pros: Digital platforms allow issuers and fund managers to tap into a huge network of investors regardless of geographic constraints. Additionally, investors will have the ability to plug into these platforms to be exposed to more potentially lucrative deals. Online platforms address some of the biggest pain points both fund managers and investors typically face when raising capital, which include limited access and a lack of transparency. Furthermore, as investors are increasingly looking towards investing in alternative investments for portfolio diversification, online platforms will help provide them with direct access to investment opportunities.
Cons: Online capital raising as a tool is still in its infancy. Currently, most funds raise capital in the traditional way, leaving a lot of capital on the table by not casting a wider investor net. The newness of this process inherently has a learning curve attached to it.
All of these tools can be an appropriate way to raise capital at any given time. Considerations like the experience of the issuer, location, and size of the raise will determine which tool ultimately will be most useful. This industry, particularly as it relates to raising capital, is fragmented and disjointed. The ability to consolidate these fragmented pieces online will contribute to more efficiency and transparency in the industry.
DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. Visit DarcMatter to start raising capital or get transparent access to alternative investment opportunities.Visit DarcMatter